[WSBARP] Judicial foreclosures and HOAs

Mon Feb 1 12:04:14 PST 2016

Thanks Rob for raising this issue.  I do a lot of probates, and for the past few years, whenever I have an underwater home in the probate and the PR has decided to let it go back to the bank, the bank has done a judicial foreclosure.  Is this because they are not able to foreclose under the nonjudicial foreclosure statutes because of the notice requirements? Or is it because a foreclosure involving a deceased homeowner is in more jeopardy of being challenged by the heirs?

One would think lenders would continue to foreclose nonjudicially.  Most lenders do not file a notice to creditors, even when we give them notice, so they will not be able to obtain a deficiency judgment, and they will avoid the redemption period (although they will probably avoid it anyway because the property would be considered abandoned).  I'm curious as to why lenders opt to spend the additional bucks to go the judicial route.

I just had an experience where the lender agreed to accept a Deed In Lieu (DIL), and even agreed to accept my Specialty Warranty Deed form.  However, when I told them the PR would not sign the indemnification and warranty and representation affidavit and agreements that accompanied the package, they declined to accept the DIL.  Which to me makes no sense, because they had their title commitment showing there were no downstream encumbrances they had to be concerned over, they had not filed a claim, even though we sent them a notice to creditor, and the claim period is expired, and after completion of the judicial foreclosure they will be in exactly the same position they would be now if they accepted the DIL.  I am scratching my head as to why they chose that route.

I'm also wondering if there is any reason I should not close the probate, even if the judicial foreclosure is ongoing?  And, if I do, does that mean the lender cannot continue with the action until they appoint their own PR?

Jeanne

Jeanne J. Dawes
Attorney at Law
Gore & Grewe, P.S.
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From: wsbarp-bounces at lists.wsbarppt.com [mailto:wsbarp-bounces at lists.wsbarppt.com] On Behalf Of Rob Wilson-Hoss
Sent: Monday, February 01, 2016 11:22 AM
To: 'WSBA Real Property Listserv' <wsbarp at lists.wsbarppt.com>
Subject: [WSBARP] Judicial foreclosures and HOAs

          I just want to introduce this topic and see if anyone else cares. I represent many HOAs and some condos and coops. This means many interactions with lenders around nonpayment of both loans and association fees. These days, lenders are filing more judicial foreclosures to address dead borrowers and other difficult issues. That is their choice. But they almost always name the association as a defendant, and claim, and seek relief about, extinguishing all rights of defendants.

          This is absurd, as a bank judicial foreclosure of a deed of trust in a covenanted community cannot (usually) extinguish the application of the covenants to the property. Certainly one issue is priority, bank loan to association delinquency, and that is a complicated issue involving the form of the association (condo or HOA/coop); if a HOA/coop, the language of the governing documents; and so on. Putting priority and payment issues aside, there are very likely a whole lot of other very important rights that associations and members of associations have in property that is being foreclosed, including the rights to the property condition and behavioral covenants, for example.

          For a lender to file a complaint and serve it on an association that seeks to extinguish those rights is, well, not something they teach in law school. Of course, my release date from law school was 1978, so things may have changed.

          So, who cares? First, there is a difference between associations with lawyers who call the banks on these complaints, and insist on a dismissal and judgment language that excepts covenant rights; and smaller (usually) associations that just ignore these lawsuits. But if the association is sued and is defaulted, then the judgment is going to say that all of its rights are extinguished.  Never mind the mess that needs to get unwound around unknown persons claiming rights being served by publication - I doubt that this can reach the individual members who usually have individual rights to enforce covenants, because they are known, and without service the judgment is void against them for want of jurisdiction.

          I guess I care because these things mess up the record for the lots foreclosed and sold.

          I will say that the bank lawyers I have dealt with about these issues typically agree, agree to a dismissal, and usually include language in the judgment that excepts the association, although not always. Twice I have had to make them go back and change the judgment to except the association from the general language extinguishing all other liens or encumbrances.

          Second, if an association is not prior, such as a condo or HOA without priority language, why should the association have to pay for an hour or two of its lawyer messing around with this to get the lender to do what it should have done in the beginning? And then following it to the end to make sure the judgment is what it is supposed to be? I suppose I could send out a CR 11 warning right away and let them take care of it directly, but that sounds like it would be more work in the long run, in most cases; and very unfriendly as well.

          Anyone else care? Anyone? Buehler?

Rob

Robert D. Wilson-Hoss
Hoss & Wilson-Hoss, LLP
236 West Birch Street
Shelton, WA 98584
360 426-2999
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